Jul 18, 2022

Types of management accounting

Types of management accounting

In a small business, even a small amount counts, so keeping an eye on your bottom line is a necessary audit, as management accounting reports provide you with the information needed to cut costs, reward high-performing employees, trim weak product lines, and invest in goods that offer the best. A financial return for your business.

Depending on the type of projects your business takes on and the sensitivity of your financial information to time, you can request or generate quarterly, monthly, weekly, or even daily reports.

management accounting systems

Management accounting systems focus on tracking costs associated with the production of goods and services in a company, and some of the most common systems include traditional cost accounting, simple accounting, productivity accounting, and transfer pricing.

Each of these management accounting systems provides companies with a different way to track costs in order to produce goods and services at the lowest possible cost, and not following either system can result in expensive goods and lower gross profit margins.

Traditional management accounting systems

Traditional management accounting systems track costs using work order or costing methods, and each of these and other methods determine how a company allocates costs related to direct materials, direct labor, and manufacturing overheads.

 Work order costing is used for large projects as all costs can easily be traced back to individual projects.

Process costing allocates costs based on the number of processes used to produce homogeneous goods. These goods go through a continuous process and are difficult to cost individually.

flexible accounting

Lean accounting is a more revolutionary technology in terms of management accounting systems, and instead of focusing only on costs, lean accounting is a method that offers a strategic way to reduce costs by eliminating waste.

 Accountants in this system will provide almost instant financial information for making decisions, evaluating value streams, and measuring profitability. Any extra costs may be waste and cut out of the system based on this information.

Productivity Accounting

Productivity accounting is not usually seen as a costing process under traditional management accounting systems, and accountants focus on identifying bottlenecks within a company's production system.

Constraints include insufficient levels of material, labor, or production capacity from the company's facilities. Reducing these constraints allows more productivity to increase production volume, thus lowering the cost per individual unit produced, and in most cases, this method can work with traditional work order or operations cost systems.

Transfer pricing

Transfer pricing is another common management accounting system. Under this method, companies will cost goods as they move through different departments, and each item goes through transfers to different departments or process, where each item adds a small portion of costs to the product.

Overhead costs added to the transfer price include variable costs and opportunity costs. Opportunity costs represent the amount of money it would cost a company to outsource production. Other methods of transfer pricing are also available, and the flexibility of transfer pricing is often seen as a benefit of this system.

The importance of management accounting

1. Data availability: It serves as a vital source of data for planning, and historical data captured by management accounting shows business growth, which is helpful in forecasting.

2. Data analysis: Accounting data is presented in a meaningful way by calculating ratios and forecasting trends, then this information is analyzed for planning and decision-making.

For example, you can categorize the purchase of different items based on time period, supplier level, and region level.